What a marvellous bogeyman our AAA credit rating has become, with both sides of politics trying to use it to frighten the horses and blaming the other for the supposed problem.
And this is just warm-up posturing ahead of the mid-year economic and fiscal outlook (MYEFO) on December 19.
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Beware MYEFO myopia
Guesstimates are rolling in about whether this yearâs budget deficit forecast has blown out on low wages growth or is holding on thanks to higher commodity prices. Michael Pascoe comments.
While Malcolm Turnbull declares Bill Shorten is a threat to our AAA status, Chris Bowen lays all the blame at the government's feet while warning that a downgrade will cost every mortgage holder dearly. Maybe – or maybe not so much.
There are bigger forces at work in the world. The threat or promise of Donald Trump being a big-spending, big-borrowing, lower-taxing President, and OPEC boosting the oil price have done more to global bond markets and the cost of longer-term money than could be done by one credit ratings agency moving us down a notch from the top spot.
AMP chief economist Shane Oliver thinks there's a good chance that we'll drop a level, but puts the impact in perspective: "Based on other countries that have been downgraded it's 50/50 as to whether borrowing costs would actually rise in response. Italy and Spain have lower ratings than Australia and yet have lower borrowing costs. And in any case if mortgage rates do rise in response to a downgrade, the RBA can always cut the official interest rate in order to bring them back down to where it wants them.
"In fact the main blow from a downgrade would be what it tells us about the deterioration in the quality of economic policy making in Australia."
Capex makes for easy scary headline
Meanwhile, in the real economy, the latest Australian Bureau of Statistics capex count continues to provide the easy scary headline of falling capital investment thanks to the resources industry, but the outlook for non-resources investment has picked up a little more.
Whether the MYEFO shows this year's budget deficit is up or down by a few billion dollars doesn't matter nearly as much as the trend for non-resources capex to slowly pick up. Our present quite nice rate of economic growth is primarily dependent on household consumption continuing to grow at a real three per cent, while wages do nothing in real terms. It's OK to run down the savings ratio for a while, but it's eventually unsustainable.
![Treasurer Scott Morrison's delays over a return to surplus has prompted credit ratings agency S&P to put the nation's ...](/web/20161204084327im_/http://www.theage.com.au/content/dam/images/g/t/1/k/k/i/image.related.articleLeadwide.620x349.gt1pab.png/1480630667227.jpg)
The growth in housing investment is coming to an end as building approvals plateau (albeit at a high level) and our governments remain committed to fiscal tightening (albeit slowly).
The other factor in favour of a higher GDP number is the fall in resources investment bottoming out. That element is the key to Treasury's forecast back in May that GDP growth would be 50 points higher next financial year – it's not from a positive surge of activity, just the end of the drag.
The ABS measure of private capex is seriously faulty as it doesn't include health, education, agriculture or software, among other things. Today's figures aren't much more than half the game, but it's the best we have available to gauge the state of investment's animal spirits.
Within those limitations, the best guide is the category "other selected industries". The good news is that the nation's chief financial officers are continuing to loosen the purse strings – their latest estimate for OSI capex this financial year, $58.5 billion, is up 4.7 per cent on the previous quarter. It's 3.7 per cent higher than the same estimate this time last year.
The May budget forecast a rise in non-mining investment of 3.5 per cent this financial year. Scott Morrison might yet be lucky.
But that won't get in the way of increasing credit rating/GDP growth/deficit speculation as the MYEFO nears.
Just remember that all the figures thrown around about which side has the faster deficit reduction plan are based on the assumption that the economy will be growing at exactly the right speed from 2018-19 to absorb excess capacity over five years. We all should be so lucky.
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